Chinese Crash Crushes Stock Market as Obama Imitates Chinese Economy

On Monday, the global stock crash continued with the New York Stock Exchange dropping nearly 1,000 points at times, before bouncing back up to a 500-point loss as of mid-morning Eastern Time.

The crash has been precipitated by China’s devaluation of the yuan, a move that observers saw coming for months given China’s weak economic fundamentals. China’s yuan devaluation means that China seeks to pay back its creditors with inflated currency and undercut America’s exports to China. The devaluation signals that the fake Chinese boom touted for years by the West has now failed. It also means that Chinese citizens will starve, because devaluing currency means that the Chinese people will no longer be able to afford foreign imports, including food.

China’s economy has surpassed the United States’ in absolute terms, based largely on the back of massive debt and inflation. As of mid-2014, according to McKinsey & Co., China carried a total government, corporate and household debt of $28 trillion – 282 percent of the country’s annual GDP, according to Bloomberg. China built its economic boom on the back of borrowing, artificial stimulation of the credit markets, and subsidies to companies, particularly in construction. China has published statistics showing tremendous growth rates for years, but those growth rates were crafted from nonsense in the same way that the Obama administration has claimed historic economic recovery on the back of borrowing and tacit inflation.

China has been able to artificially prop up its economy because it is a tyranny. Back in July, Foreign Policy observed, “China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthless, and recklessly, to turn those prices around.” The Chinese government kept boosting borrowing for purposes of investment in the stock market, even as its underlying economic fundamentals fell through the floor:

Prior to the crash, China’s stock market had enjoyed a blissful disconnect from reality. As China’s economy slowed and corporate profits declined, share prices soared, nearly tripling in just 12 months. By the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above a preposterous 85-times earnings. It was a clear warning flag — one that Chinese regulators encouraged people to ignore. Then reality caught up.

From June to July, the Chinese stock market dropped 32 percent, including 8.5 percent in one day on July.

As always, when tyrannical countries begin to crack, they crack down on their own people. For months, China’s attempts to stop its stock slide have included throwing top stock traders and regulators in prison. Today, George Chen, managing editor of South China Morning Post News, tweeted that Chinese authorities had “issued notice to state media to censor negative market reports following #BlackMonday.”

Optimists about China point to the fact that China has $3.7 trillion socked away in foreign exchange reserves. But that should present the world with a far larger worry: what happens if China decides to liquidate its assets? If to meet its crisis, China began selling off American debt, that would act as a solar plexus punch to America’s economy, making it difficult for America to continue selling new debt and forcing America to raise its own interest rates – a move the Federal Reserve has been loathe to make, considering the fragility of the so-called Obama recovery. And China has already explored selling US debt: in two months earlier this year, China sold $120 billion in US Treasuries. Considering China holds $2.2 trillion in American debt, at least publicly – because of China’s nontransparency and use of front buyers, we actually don’t know how much American debt the Chinese hold.

Donald Trump suggests the solution to this problem would be placing trade barriers on Chinese goods. That would be a fool’s errand: the fact is that comparative advantage, a basic principle of free trade and economic growth, does not lose its efficacy because one partner runs its business badly. Cheaper products are good for American consumers; America’s successful industries aren’t undercut by Chinese production of electronics. Only our less-productive industries are.

The problem isn’t trading with China – after all, we trade with lots of countries that are poorly run – but that America is imitating China. For all the talk about China embracing a more capitalistic mindset, America has been gradually shifting its economy toward the Chinese model for years, and selling our debt to China in order to fund that shift. As Kevin Williamson points out today at National Review:

Malinvestment: It is a pickle. And we’re in the same jar….There isn’t any way around this: If you distort markets, you will, eventually, discover that everybody has taken out second mortgages on their Chinese ghost-town vacation condos to invest in tulip bulbs.

Centrally-planned economies have always fascinated Western leftists, and Barack Obama is no exception. Obama infamously stated back in March 2011, according to The New York Times, that “it would be so much easier to be the president of China.” Just three weeks ago, Obama lamented that China’s infrastructure spending methodology was far better than that of the United States, even as China was in the process of going bankrupt over its subsidized construction industry. Praising the corporatist Export-Import Bank and weeping over its hold-up in Congress, Obama stated:

We can’t keep on funding transportation by the seat of our pants, three months at a time. It’s just not how the greatest country on Earth should be doing its business. I guarantee you this is now how China, Germany, or other countries around the world – other big, powerful countries around the world handle their infrastructure.

One of Obama’s favorite authors, Thomas Friedman, has long backed the Chinese way of doing business. In September 2009, Friedman wrote:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

Under President Obama, America has moved closer to Friedman’s long-desired one-party autocracy. And President Obama is committed to pursuing the same policies that underlie China’s crash – a crash with the potential to cripple the global economy. If we don’t bail ourselves out by abandoning Chinese-style economics rather than pursuing it, we will meet their same fate.